Financial Myths

US Secretary of State Colin Powell recently called US President George Bush, Jr. with some good news and bad news about UN inspections for Iraq’s weapons of Mass Destruction (WMD), “Mr President, the good news is that Saddam Hussain has agreed to unconditional across-the-board inspections, the bad news is that he has asked for “Arthur Andersen” to carry out the inspections.” That joke sums up the backlash of the ENRON financial scandal that has afflicted a score of previously untouchable US blue-chip multi-billion dollar companies like Worldcall, Tyco etc, almost all major international accounting firms like “Arthur Andersen” are under pressure because of “creative accounting” and/or fudging financial numbers. When World Bank President Wolfensohn accused the Ms Benazir Regime in 1996 of fudging statistics, he was being discriminatory, almost all governments are guilty of this “soft” white collar crime of inflating their revenues and masking their expenditures, India regularly puts military pensions and border fortifications under innocuous “Heads” other than “Defence Expenditures”. In this new world of accounting “glasnost” it is becoming harder to mask the financial shenanigans of the kind that this country (and the world) has been witness to.

The World Bank (WB) Pakistan Country Update 2002, the latest independent external report on the State of the Pakistan’s economy, advises Pakistan to continue a credible and apolitical accountability process to instill the respect for the rule of law. The report highlighted numerous economic challenges frustrating efforts to lower rising poverty in the country, however the WB report praised the steady pace of reforms and achievements on the external account, which has certainly  improved the macro picture.

Governor State Bank of Pakistan (SBP) Dr Ishrat Hussain recently warned that populist measures are anathema for economic reforms, in the end they frustrate good governance. Authoritarian regimes can give good governance because it is far easier for them to implement reforms than for political governments. When General Pervez Musharraf took power, the economy was in shambles, the major reason being the duality of approach of his predecessors in political power. Contrary to public perception, the infectious disease of corruption spread with the nationalization spree of the early 1970s but it was really institutionalized during the non-democratic period of Zia’s military regime from 1977 to 1985. By killing private enterprise the first PPP regime (1971-1977) succeeded in beggaring the country without raising the standard of living of those below the poverty line. The real “killer” was Bhutto’s nationalization of commercial banks, all viable and extremely profitable entities before public sector control. Fortunately for Pakistan, the artificial sustenance of home remittances by expatriate Pakistanis in the 70s and the 80s fueled Pakistan’s economy and prevented it from collapsing. With 1977 came the Zia military regime’s blind reliance on Ghulam Ishaq Khan’s myopic economic policies. The Pakistan Banking Council (PBC) which ran the Nationalized Commercial Banks (NCBs) inculcated many corrupt practices but the NCBs avoided suffering the same rampant public loot as that perpetrated by un-accountable bureaucrat managers running nationalized industries and commercial enterprises during the period between 1977 and 1985. The NCBs became susceptible after 1985 with the advent of democracy. By mid 1990, there was a general realization that before de-nationalization (or its more sophisticated term “privatization”) the NCBs badly needed to be reformed.

When loans are given without financial viability and merit it is a recipe for trouble, when the bank knows that the recipient has no intention of returning the loans then it spells financial disaster. The NCBs competed with each other to give atrocious loans, sometimes for personal financial gains by the bankers themselves, but mainly due to political and/or bureaucratic coercion and/or a combination of all three. While we got a lot of rich bankers and nouveau wealthy “businessmen”, this proverbial last straw destroyed Pakistan’s economy. Spending illegal money within the country would be bad enough, unfortunately for Pakistan the “private banking” ploy came into play i.e. how to stash illegal money in numbered accounts abroad, and earn “profit” on the sum “invested” on the advice of “investment advisors”, a sophisticated means for money é laundering. And who were these “private” bankers and “investment advisors”, what was the lineage of these “patriotic” Pakistanis, how did they manage such easy access to the crooked and the faithless, what role have they played in beggaring Pakistan? And have they been taken to task or do they still enjoy universal power within the country? We will explore the rank chicanery  of these PR artistes in subsequent articles.

There has been substantial “economic revival” since Oct 1999 but to give all the credit to the Musharraf regime would not be entirely fair to the political regimes that preceded them. With the economic sword of doom hanging over them, first Mian Nawaz Sharif in 1991, and then alternately Ms Benazir and Mian Nawaz Sharif, made moves to reform the economic imbalances, nudged along forcefully by the World Bank and the IMF. Ms Benazir persevered with the creeping independence of the Central Bank as mandated by former World Bank employee Moin Qureshi during his “Caretaker” stint as Pakistan’s PM in 1993. While Mr VA Jafarey did a good job as her Finance Advisor, Senator Sartaj Aziz (and his successor Senator Ishaq Dar) did an outstanding one for the Mian Nawaz Sharif government. In the face of their leader’s profligacy they held their ground and thus saved the economy from irretrievable damage. Sartaj Aziz made drastic changes in the NCBs to retrieve the abysmal economic situation. With good advice from SBP Governor Yaqub Khan, he dismantled the Pakistan Banking Council (PBC) in 1977, among the (five) financial reforms was SBP’s autonomy. The government turned to expatriate Pakistani bankers, acquiring the services of the superb Moinuddin Khan from Standard Chartered to re-vamp the Central Board of Revenue (CBR) and two outstanding Citibank executives, Shaukat Tareen for Habib Bank and Zubyr Soomro for United Bank. All three sacrificed their upwardly-mobile careers for the sake of their country. Though extremely hard to attract an effective team of banking professionals attuned to modern practices, they managed to cajole other Pakistani expatriates enjoying excellent jobs abroad to return home to lower salaries (and percs) and rank uncertainty, using personal friendships to appeal to their patriotism and sense of duty. Some home-based jobless black sheep did slip in, for the most part the team members selected were outstanding.

Re-structuring was a totally new discipline for (late) Moinuddin Khan, known as a strategic planner par excellence and logistical genius in banking circles, nevertheless he turned CBR around to an extent. History must record that Finance Minister Sartaj Aziz enacted the first reforms by the Mian Nawaz Sharif government in 1991 but the trio, Moinudin Khan, Shaukat Tareen and Zubyr Soomro, should also be credited for seriously starting on the road back to a semblance of economic sanity in 1997. Unfortunately for Pakistan, Mian Nawaz Sharif’s sincere intent ultimately came to grief at the altar of populism.

The first to fall from favour was Moinuddin Khan, his CBR made the (political) mistake of targetting some of Mian Nawaz Sharif’s friends and (fellow) politicians as major tax evaders. Shaukat Tareen was almost put on ice because he would not sanction dubious loans, worse he tried to recover loans, what cheek! Similar pressures started being applied on Zubyr Soomro. Because of Pakistan’s liberal foreign exchange policies (annunciated to his credit by Mian Nawaz Sharif), Pakistanis abroad (and within Pakistan) had deposited about US $ 10 billion in our coffers. The extravagant spending of each of the alternate political governments of Ms Benazir and Mian Nawaz Sharif over the past decade had eaten this up. May 28, 1998 brought the Catch-22 watershed of all of Pakistan’s financial problems. With Pakistan’s exploding the bomb in retaliation to India’s nuclear initiative of several weeks earlier, the economic planners braced themselves for large scale withdrawals. With nothing in the treasury to stop a “run” on the banks, the government froze “foreign exchange” accounts and thereby sent Pakistan’s financial credibility into a tailspin. Money shies away from uncertainty, we became literally bankrupt. While the financial responsibility has eventually been made good, the damage was done, confidence in Pakistan’s financial commitments was badly eroded.

Mian Nawaz Sharif was a populist trying to be a reformer, his populism won out to the detriment of Pakistan. Senator Ishaq Dar who replaced Senator Sartaj Aziz as Finance Minister combined with SBP Governor Yaqub to get the best deal possible from IMF in the circumstances, it was not good enough to rescue Pakistan economically. The May 28 foreign exchange “freeze” was the final nail in Pakistan’s economic coffin, we staggered along. What the military regime inherited on Oct 12, 1999 was a gigantic economic mess. The only bright spot, the reforms enacted were slowly taking hold but many more were needed and at a more drastic pace. This could only be possible under authoritarian rule, this the Musharraf military regime provided on Oct 12,1999. Could Musharraf’s team have done better?

Mr. Ikram Sehgal is Publisher and Managing Editor of Defence Journal (Pakistan).